THE DAY AHEAD: Verity is 'bruised not broken'

Verity (Nasdaq: VRTY) was winning Wall Street's earnings game for more than a year, but that streak ended with a thud on Wednesday after shares were nearly halved because the company missed estimates. Verity, however, may be a bargain after Wall Street overreacted.

Verity, which makes Web search software for corporations, reported second quarter earnings of 9 cents a share and Wall Street was expecting earnings of 12 cents a share. Revenue came in well below of expectations at $16.7 million. The figures aren't adjusted for Verity's recent stock split.

Verity: Time to buy?

Analysts downgraded the stock and lowered their expectations. Verity pumped up expectations, failed to deliver and was hammered. But did it really deserve a 46 percent haircut?

Probably not. "You have to draw two lines between Wall Street and the fundamentals," said Jason Maynard, an analyst for The Siedler Companies, which downgraded Verity from "buy" to "neutral." "This is a momentum market and when you lose it you lose. Verity is bruised not broken."

When you look at the reasons Verity missed estimates you might find a buying opportunity here. Gary J. Sbona, CEO of Verity, said in a statement that the company missed estimates because it failed to close three big deals in the second quarter.

But two of the delayed deals have been closed (boosting third quarter revenue) and the company was "aggressively working" on closing the third transaction (boosting third quarter revenue even more.)

Verity also said demand remained strong and its "plans, goals and performance objectives for this fiscal year remain unchanged.''

Aside from the second quarter hiccup, business for Verity is fine. Analysts jumped off the Verity bandwagon because they want to make sure this quarter was just a hiccup.

You can also find a little optimism in the analysts' downgrades Wednesday. Banc of America and Dain Rauscher Wessels downgraded the stock because revenue was far short of the $21.5 million expected.

Banc of America's Greg Vogel cut Verity to a "market perform" from "buy" and trimmed estimates. He now sees profits of 58 cents a share on $83.8 million in sales for fiscal 2000. He originally forecasted earnings of 74 cents a share on sales of $90.6 million.

However, Vogel said he would buy the stock below $26 a share and added that Verity could recover in the third quarter. In an interview with ZDII, Vogel said Verity had execution problems and got some pushback on pricing at the end of the quarter. Whether that means Verity is seeing pricing pressure remains to be seen. The good news here is execution issues can be fixed.

Long-term, Verity is in good shape because demand for Web searching tools isn't going away. "Long term the prospects are OK, but this last quarter makes you nervous," said Vogel, who said Verity now has to reassure investors with a few good quarters.

Dain Rauscher, analyst Stephen Sigmond said the revenue delay was a problem with sales execution and not market opportunity. He downgraded the stock to "buy" from "strong buy" and cut his estimates.

Yes, Verity was downgraded, but the analysts were relatively upbeat. We've seen Wall Street overreact too many times before to not believe Verity will rebound.

You could argue Verity was overvalued in the first place, but doesn't one of the few profitable Internet companies deserve a little premium?

The downgrades and lowering of expectations is just the first phase of a comeback. By topping estimates by a mile in its last four quarters, Verity painted itself into a corner. Here's Verity's earnings history that put it in its current expectations corner -- it doubled estimates in the first quarter, handily beat consensus in the fourth quarter, topped whisper numbers in the third quarter, and creaming last year's second quarter expectations.

That's not a bad track record. And now that Wall Street isn't expecting much, Verity could again look like a superstar in a few quarters. The game isn't over for Verity. It's just that the expectations have been reset.

For now, however, Verity is taking a breather. "I don't feel there is a fundamental problem here, but they thought they had the quarter in the bag, but couldn't close those three deals," said Vogel. "Verity will take a breather and we'll reassess them."

CMGI: Full-steam ahead

CMGI (Nasdaq: CMGI) once again issued an earnings release that could give an elephant indigestion. The company has so much going on it's hard to keep track. For an investor, it takes a few days just to digest the news.

Here's the short version of what it all means. In the short-term, CMGI shares will soar on a stock split and surging revenue courtesy of its Internet operating companies, namely AltaVista.

In the long-term, CMGI chief David Wetherell said the company will continue to acquire companies and plans to pick up the pace (is that possible?). Wetherell on a conference call said CMGI plans to acquire three companies a month and not take any time off to digest them. "He who rests rots," said Wetherell, referring to the new economy.

The next milestone for CMGI will be coming shortly -- the company is expected to announce how the integration of its recent marketing properties is going. CMGI acquired Adforce, Flycast and most recently Yesmail.com.

Oh and let's not forget the venture capital investments. On that front, CMGI is launching a business-to-business venture fund.

When it's all said and done -- CMGI will have 120 companies in its network this time next year, compared to 58 today.